Ways to reduce your home loan sooner.

Sources are constantly saying pay your loan off sooner! It is important to know that this is not always as simple as it at first seems but can be achieved to various degrees through various methods.

There are several ways to pay your loan off early, the most obvious is to make extra bulk payments that decrease the principle amount of the loan, the effect this will have on the length of your loan will depend on the amount you pay off.

As this is not always suitable there are other ways to reduce your loan sooner. If you make your repayments on a weekly basis this will also reduce your loan term and the amount of interest you pay in the long term.

It does this in two ways, the first is that as interest on your loan is calculated daily and charged monthly the lender will be calculating on a smaller loan amount each week and therefore you will be charged less interest and pay off more of your loan principle.

Secondly if you pay weekly you are in fact paying an extra 4 weeks worth of loan repayments each year than you would if you were to pay your loan on a monthly basis.

Another tool you can use to reduce the amount you pay is to set up an offset account (make sure it is a 100% offset). To use an offset account effectively is to keep a reasonable amount of money in the account at all times. An offset account works on the basis that whatever the balance in your savings account is when interest is calculated on your loan will be taken off the balance of loan they charge interest on.

For example if you have $50,000 cash sitting in your offset account and the balance of your loan is $250,000 you will be charged interest on a loan amount of $200,000.

If you look at the average savings accumulated through surplus funds the real benefits would be more as follows,

Monthly loan amount $250,000
Monthly income $4,485
Monthly interest rate 6.57%
Monthly expenses $2,093
Loan term 30 years
Monthly repayment $1,592
Monthly surplus $800

Based on these assumptions, an offset product will save you approximately $21,000 in interest costs over the life of the loan, and help pay the loan off 1.5 years sooner. You will notice that many lenders state that you can take years off your loan through the use of an offset account, this is based on the assumption that you also make extra repayments to your loan.

The other benefits, aside from straight interest savings are;

Offset products avoid redraw fees while still utilising surplus funds to reduce interest costs.

Offset products offer tax benefits to borrowers as they will not have to pay tax on interest earned on money's held in savings.

Another popular method of savings on your mortgage is to have a line of credit product where you can have your salary directly credited to your account, with this you work from a credit card for your monthly expenses and your credit card is cleared once a month.

Generally the best way to use this account is working from the basis that most people do not spend all of their pay each period, therefore any surplus goes to paying off the principle of your loan. It also works in a similar way to an offset account in that the interest is being calculated on a lower amount each day, and providing you do not spend more than you earn this can be a very effective way to save money on your loan.

The main potential drawback can be discipline, if you find it hard to not spend up big on your credit card, or you tend to spend your entire pay each period then this may not be the account for you as it is very similar to having a big credit card on call.

When it comes down to it each individual has different circumstances and what may suit one may not suit another so it is important to have a look at your situation and decide what will suit you.

Ask your mortgage consultant the questions you need to make the best decision.